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CBOT Defends
Decision to Limit
Treasurys Contracts

By

Peter A. McKayStaff Reporter of THE WALL STREET JOURNAL

Updated Aug. 12, 2005 12:01 a.m. ET

The Chicago Board of Trade defended its decision to limit the number of Treasurys that futures contract holders could demand for delivery -- a move that some say caused big losses in the bond market this summer.

CBOT moved after a shortage of available Treasurys drove up prices as the June quarterly futures contracts -- promises to deliver bonds on a certain date -- were about to become due. The contracts are issued by CBOT, which dominates the Treasury futures market. The new rule, effective for contracts due in December and thereafter, forces traders to limit their futures holdings in the 10 days before they are due.

Traders criticized the rule, because it caused 10-year Treasury futures due in September to plummet, leading to big losses just as the market was reeling from a shortage of 10-year Treasurys available to fulfill such contracts.

In a letter to the Futures Industry Association, CBOT President and Chief Executive Bernie Dan said the late-June rule was a timely response to shifting conditions in the government-debt market. It was the CBOT's first public explanation of its actions since the summer shortage, known in bond parlance as a "squeeze."

Mr. Dan emphasized that 10-year bonds had become difficult to obtain by futures sellers seeking to meet demands for delivery. He said the exchange imposed limits to keep deliveries orderly and prevent an even worse shortage.

But some traders, including FIA members, dispute whether the rule will be effective, complaining it was unwise for the exchange to enact a change that affected -- however unintentionally -- the September contracts that already had a significant number of bets outstanding.

Mr. Dan noted that federal-budget surpluses from 1999 to 2001 led to reduced government borrowing and thus fewer available bonds.

CBOT Defends
Decision to Limit
Treasurys Contracts

The Chicago Board of Trade defended its decision to limit the number of Treasurys that futures contract holders could demand for delivery -- a move that some say caused big losses in the bond market this summer.